ICE to offer mortgage hedges based on rate locks

Intercontinental Exchange, the parent of ICE Mortgage Technology and the New York Stock Exchange, is launching two futures contracts based on rate-lock activity.

The contracts will be available starting on June 13, pending regulatory approval. They will be cash-settled and based on the ICE U.S. Conforming 30-year Fixed Mortgage Rate Lock Index and the ICE U.S. Jumbo 30-year Fixed Mortgage Rate Lock Index, which track residential mortgage loan applications where the borrowers have locked in the interest rate prior to closing.

ICE Mortgage Technology has units across the mortgage spectrum, including the Encompass loan origination system, which it acquired in the Ellie Mae deal. Prior to that, Intercontinental Exchange also purchased MERS and Simplifile.

"ICE Mortgage Technology's industry-leading network coverage allows it to deliver a unique risk management instrument based on actual mortgage lending activity across the U.S.," said David Farrell, chief operating officer of ICE Futures U.S., in a press release. "As inflationary pressures challenge all major economies and interest rates are being changed more frequently, we believe these mortgage futures will provide a better hedge to manage portfolio exposure to U.S. residential mortgage rates."

Hedging activities is the primary reason a mortgage lender would purchase these futures. Lenders look to protect their origination pipeline from fallout risk — mortgage applicants that make an application but do not close on the loan. Because of the fallout, the lender cannot deliver the loan into the secondary market. Meanwhile, servicing portfolios are subject to prepayment risk.

"The contracts will provide an efficient hedging vehicle for both originators and servicers, as well as other asset managers and investors with exposure to U.S. residential mortgages," Farrell said in a follow-up comment.

Intercontinental Exchange executives on the fourth quarter earning call in February indicated they were looking to take advantage of all the synergies the company had in the mortgage business.

"With connectivity to nearly every participant in the mortgage industry, we have the opportunity to cross-sell new products like eClose and AIQ to a captive customer base seeking efficiencies," Intercontinental Exchange President Ben Jackson said during the earnings call.